So the yield curve is a fairly reliable signal for imminent recession. And notice the downward trend of the yield curve on the right side of the graph. That indicates a flattening yield curve heading towards inversion.

And when we zoom in, the picture looks even more dire.

As of July 11th, 2018 the Treasury reported the difference between the 2-year and 10-year bonds to be 27 basis points (or .27% – see chart below).

This is the lowest spread since the 2008 Great Recession, and already much lower than the historical graph above.

There is no doubt the yield curve is flattening, and at an alarming pace.

Taking the historical data into account, if this trend continues and it does invert, that would be a signal of an imminent recession.

But strangely, it looks like the Fed wants to sweep the yield curve signal under the rug.

Fed: “When the Yield Curve Creates Doubt, Throw it Out”

So as the curve flattens, and gets ready to signal a recession, at a recent FOMC presentation the Fed examined the prospect of replacing it.

Wolf Richter commented on this presentation, and explained what the “new” indicator examined:

This new indicator – rather than looking at the spread between longer-term yields of two years and 10 years – is looking at the spread between short-term yields. It’s “based on the spread between the current level of the federal funds rate and the expected federal funds rate several quarters ahead derived from futures market prices.”

There was no indication in this meeting that the FOMC members had any doubts about the reliability of the original yield curve signal.

But unusually, the “staff” did hint that the change-of-indicator may be made because they don’t like what the flattening yield curve points to.

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